South Korea Keeps Rates on Hold as Officials Watch Yen Slide

“If growth stays low for long, it’s difficult, or even impossible, for it to return to its potential,” said Kim Choong Soo, governor of the Bank of Korea, seen on Nov. 12, 2012. Photographer: SeongJoon Cho/Bloomberg

Governor Kim Choong Soo and his board kept the benchmark
seven-day repurchase rate at 2.75 percent after a 25 basis point
cut in October, the central bank said in a statement in Seoul
today. For a second month, the decision was not unanimous.
Fourteen of 15 economists surveyed by Bloomberg News predicted
the decision and one forecast a cut.

Japan’s “expansionary policy operations'' and fiscal
tightening in advanced nations are among risks for a South
Korean economy that is showing signs of gradual improvement, the
central bank said. The frontloading of government spending in
the first half of the year is already giving growth a boost and
Deutsche Bank AG says a supplementary budget may be announced by
Park’s administration in March.

The central bank may “decide in March to see if fiscal
stimulus is sufficient in terms of size and scope to reduce the
level of uncertainty in the economy,” said Wai Ho Leong, a
senior regional economist at Barclays Capital in Singapore.

The won gained 0.2 percent to 1,084.80 per dollar at 10:42
a.m. in Seoul, according to data compiled by Bloomberg. It
earlier rose as high as 1,084.27, near the strongest level since
Feb. 6. The won was little changed at 11.60 per yen, according
to data compiled by Bloomberg.

Currency Comments

Commenting on currencies ahead of a meeting of Group of 20
finance officials in Moscow, Governor Kim told reporters that
it’s “most desirable” for foreign-exchange rates to be set by
market fundamentals. While the global currency debate and fiscal
problems in advanced economies point to risks for South Korea,
Kim doesn’t believe they will materialize, he said.

The governor said that the currency is an important
consideration in interest-rate decisions, without being the
determining factor.

As Japanese policy makers defend their efforts to counter
deflation and spur growth, former Japanese Ministry of Finance
official Eisuke Sakakibara took a different view yesterday,
saying that his nation is hurting trading partners by weakening
the yen.

“Guiding the yen lower is a policy that punishes
neighboring nations,” Sakakibara, 71, said in an interview in
Tokyo. Impressions overseas that Japan is trying to
orchestrate further declines in the yen mean that “it will be
criticized by the G-7, as well as the G-20,” he said.

Hyundai, Samsung

Hyundai Motor Co. and Samsung Electronics Co. are grappling
with the won’s 24 percent gain against the yen in the past six
months, which aids rival exporters in Japan. The nation also
faces risks from the totalitarian regime in North Korea, which
this week tested a nuclear device.

At the same time, receding concerns over Europe’s debt
crisis and the U.S. economic outlook may boost confidence and
investment, helping to fuel a pick-up in Asia’s fourth-biggest
economy.

“Borrowing costs at the current level are accommodative,
supporting the economy,” Lee Sung Kwon, an economist at Shinhan
Investment Corp. in Seoul, said before the interest-rate
decision. “Still, policy makers may want a rate cut as early as
next month if exports tumble on a weak yen.”

South Korea’s economy needs to regain momentum after a 2
percent expansion in 2012 that compares with an average of 4.3
percent over the five years through 2007, before a U.S. housing
market collapse triggered a global recession. The nation’s
potential growth rate is about 3.8 percent, Governor Kim said
Jan. 11.

“If growth stays low for long, it’s difficult, or even
impossible, for it to return to its potential,” Kim said then.
Today, the central bank said that the nation’s growth may be
below potential for “a considerable time.”